The news that Netto and Sainsbury’s are ceasing their tie-up was a surprise, but not as much of a surprise as Dansk returning to the UK in 2014.
On the face of it, this doesn’t seem a particularly measured approach. Sainsbury’s was quick to talk about the discount sector growing and its lowered exposure to shoppers given its higher quality offering – a fact that hasn’t really changed since the joint venture kicked off.
However, as we know with the discount model, you have to move to reach scale and generate buying efficiencies.
With a limited range, the purchase price for the retailer falls as they sell more.
However, with set up costs, future expansion costs (land is not cheap in the UK) and only 16 stores, there is a need for real investment to grow further.
As a payback, it would take too long to generate a return and the likelihood is that suitable sites would then become harder to come by, with some existing sites also not working as intended, which would add further complication to the growth ambition.
It’s ironic that My Local has recently gone into administration, as the previous owner of its store network Morrisons also suffered the same fate when building up its M Local chain.
The initial M Local stores at Ilkley and Wilmslow were in good locations and represented real ambition.
As the chain moved to get to scale, rapid expansion was necessary and the sites just weren’t available without an acquisition.
It was left buying up former Blockbuster and Jessops sites that weren’t in buildings suitable for a convenience store.
The locations were also problematic, with city centre areas effectively shutting after 6pm, meaning there was no lucrative evening footfall.
The Netto store estate was made up of acquisitions from the Co-op, alongside a number of stores from the wider property market.
Some will undoubtedly work better than others, but such sites are not plentiful.
It becomes much harder when growing at pace to get all the sites absolutely right.
I felt that Netto’s stores second time around - having already exited the UK once in 2010 after failing to make a go of things - were far better.
A lot of work had gone into the marketing and sourcing to ensure that this was a quality offer, complete with a bakery.
It was nothing like the Netto of old, which had a dreadful quality perception, dingy stores, was fuelled by special buys and eventually ended up being sold to Asda.
There is a human cost to the ending of the joint venture and the renaissance of Netto in the UK.
We are unclear if people will lose their roles, but there will be some people displaced.
Communities are also affected. The store in Cleckheaton only opened as recently as May as a new-build store, restoring derelict land which had been acquired by Tesco for their store expansion that will now never come.
What now for those stores? With limited capital these days, projects have to be chosen carefully and Sainsbury’s have bought Argos for £1.4bn.
The reshaping of that business and integration into Sainsbury’s will be occupying many minds at the grocer.
As for Netto, it made a major point of importing a number of products into the UK - one of the major benefits of being a part of the EU.
Only last week, a display of footballs in its stores was price-marked in both Danish KR and English pounds.
Post referendum, have we seen our first retail casualty of the decision to Brexit?
- Steve Dresser is director of Grocery Insight